Financial Review

Tax Act

Sinclair Noe — November 2, 2017

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DOW + 81 = 23,516 (Record)
SPX + 0.49 = 2579
NAS – 1 = 6714
RUT + 3 = 1496
10 Y – .03 = 2.35%
OIL + .44 = 54.74
GOLD + 1.20 = 1276.50

Cryptocurrency

• Number of Currencies: 892
• Total Market Cap: $191,672,109,146
• 24H Volume: $9,072,848,016

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	6,992.9	$117.05B	$4.53B	49.87%	1	-0.37%	+18.98%
	Ethereum	ETH	288.43	$27.72B	$881.65M	9.71%	0.0416318	+1.11%	-2.36%
	Bitcoin Cash	BCH	573.29	$9.85B	$1.61B	17.70%	0.0843124	+0.36%	+71.86%
	Ripple	XRP	0.20855	$8.36B	$334.13M	3.68%	0.0000311	+3.76%	+6.63%
	Litecoin	LTC	54.830	$2.96B	$215.29M	2.37%	0.00790139	+0.88%	-0.90%
	Dash	DASH	270.00	$2.07B	$72.19M	0.80%	0.0387367	+3.54%	-5.29%
	BitConnect	BCC	261.128	$1.92B	$23.56M	0.26%	0.037444	+2.62%	+20.44%
	NEO	NEO	25.500	$1.64B	$71.40M	0.79%	0.00362421	+4.04%	-10.88%
	NEM	XEM	0.17564	$1.57B	$8.84M	0.10%	0.000025	+6.17%	-12.27%
	Monero	XMR	84.15	$1.29B	$46.96M	0.52%	0.0121217	+1.49%	-4.02%

Record high close for the Dow Industrial Average. It was just a couple of weeks ago that the Dow crossed over 23,000 and today we top 23,500. Gains in Boeing, 3M, and Goldman Sachs helped push the Dow higher, while losses for Facebook and Tesla weighed on the S&P and Nasdaq.

Two big events today: the new tax cut plan was revealed, and Jerome Powell was nominated to be the next Federal Reserve Chairman.

Taxes first.

This is the first time Republicans have described their tax plan, the Tax Cuts and Jobs Act, in enough detail that it can actually be debated, scored by the Congressional Budget Office so its cost and effects on the rich and poor are known, and voted upon by the House and Senate. The Tax Act is over 400 pages long.  (here is the full text for your reading pleasure.)

The legislation seeks to dramatically cut taxes on corporations and consolidate benefits like personal exemptions, the standard deduction, and the child credit for individuals. It would eliminate the alternative minimum tax and estate tax, and pare back certain individual deductions. It would also offer a new low tax rate for owners of “pass-through” businesses like LLCs and partnerships, whose income from their businesses is taxed as personal income.

The bill in its current form would almost certainly give disproportionate benefits to wealthy Americans, who tend to benefit from corporate tax cuts more than non-wealthy Americans and who could likely exploit the pass-through rate by setting up dummy corporations. People earning between $400,000 and $1 million would face a significantly lower top income tax rate.

But the bill will almost certainly not remain in its current form. As written, it is almost guaranteed to increase the budget deficit by trillions over 10 years, and quite possibly keep increasing the deficit after 10 years are up.

That’s a big problem: Under Senate rules, some legislation can pass with only 51 votes only if it doesn’t increase the long-run deficit. So, the current draft of the legislation would probably need 60 votes instead, meaning significant Democratic support, which Republican leaders haven’t been even trying to court. They need legislation that can pass with 51 votes, and for that, they need the bill to not raise the long-run deficit.

That means the bill needs to change — either the cuts need to get smaller or Republican leaders need to find new ways to raise money, or both. But the bill in its current form at least suggests what GOP leaders want to do.

The new tax reform bill would significantly change individual income tax brackets:
The seven current individual income tax brackets would be consolidated to four: 12 percent (up from the current bottom rate of 10 percent), 25 percent, 35 percent, and 39.6 percent.

12%: Applies to incomes up to $45,000 for an individual and $90,000 for a married couple.
25%: Applies to incomes up to $200,000 for and individual and $260,000 for couples.
35%: Applies to incomes up to $500,000 for an individual and $1 million for couples.

Keeping the 39.6 percent top rate is a huge change from past Republican plans, which have focused heavily on cutting the maximum rate the richest households pay. However, the plan significantly reduces how many people pay the top rate: The threshold for the last bracket would increase from $470,700 for married couples today to $1 million.

The 35 percent rate would cover some affluent households currently paying a marginal rate of 33 percent, potentially raising their taxes; and the 12 percent bracket would extend into the income range currently covered by the 25 percent bracket, lowering taxes for many middle- and upper-middle-class households.

The thresholds for brackets will be adjusted according to chained CPI, a slower-growing measure of inflation than normal CPI, which is used currently; this change raises revenue over time by gradually pushing more and more people into higher tax brackets.

Performance pay and commissions above $1 million would no longer be deductible for the purposes of corporate taxes.

The standard deduction is increased, personal exemptions are eliminated, and the child tax credit is mildly boosted.

The standard deduction will be raised to $24,000 for couples and $12,000 for individuals, a near doubling from current levels.

The child tax credit, currently $1,000, will grow to $1,600, and a new $300 credit for parents and other non-child dependents in the house (the $300 credit expires after five years). The child credit would start to phase out at $230,000 in earnings for married couples, as opposed to $110,000 under current law.

The personal exemption (currently offering households $4,050 per person in deductions) is eliminated, replaced in theory by the higher child credit and standard deduction.

The mortgage interest deduction is unchanged for current homeowners, but for all future mortgages, the benefit would be capped at a home value of $500,000, down from $1 million under current law. The real estate industry will scream bloody murder.

The deduction for state and local income and sales taxes would be eliminated. Several states will scream bloody murder.

The deduction for state and local property taxes would be capped at $10,000, somewhat curtailing the current tax break.

The medical expense deduction would be repealed. Seniors will scream bloody murder. Also, interest deductions on student loan debt would be repealed. Deductions for moving/relocation expenses would be eliminated. Also alimony payment deductions eliminated.

Most major tax breaks for individuals — the charitable deduction, retirement incentives like 401(k) and IRA provisions, the tax exclusion for employer-provided health care, the earned income tax credit, and the child and dependent care tax credit — would remain unchanged.

The corporate income tax rate will be lowered from 35 percent to 20 percent. The corporate tax will be “territorial”: Foreign income by US companies will be tax-free. All untaxed income currently held overseas will immediately be taxed at a fixed rate: 12 percent for money held in liquid assets like stocks and bonds, 5 percent for intangibles like buildings and factories.

Despite the tax being “territorial” in principle, there will be a 10 percent “minimum tax” imposed on profits above a certain threshold from foreign subsidiaries of US companies in the future, to prevent companies from moving income abroad to avoid taxes. Additionally, any money that multinational corporations move from the US abroad will be subject to a new 20 percent tax.

Instead of having companies “depreciate” investments by deducting them over several years, companies could immediately expense all their investments. This benefit expires after five years, presumably to save money, which dampens any positive effect it has on economic growth.

Companies paying the corporate income tax would face a limit on how much debt they can deduct from their taxable income, a significant change for highly leveraged companies like banks. They could only deduct interest worth up to 30 percent of earnings before interest/taxes/depreciation/amortization. But real estate firms would be exempt from that limit.

Two big existing credits for corporations — the research and development tax credit and the low-income housing credit — won’t be repealed. But a deduction for domestic manufacturing is gone.

“Pass-through” companies like LLCs, partnerships, sole proprietorships, and S corporations, would get a huge number of tax cuts too: Taxes on pass-through income would be capped at the 25 percent bracket rather than the top individual rate. Pass-through companies would still be able to deduct interest on loans in full, unlike C-corporations. The 25 percent bracket creates a huge loophole for rich people, who could incorporate as sole proprietorships and “contract” with their employers so their income is pass-through income rather than wages.

To partially control that, the law would assume that 100 percent of earnings from professional services firms, like law firms and accounting firms, is wages, not pass-through income. For other businesses, people actively involved in the business as more than passive investors would see 70 percent of their income classified as wages and taxed normally, and 30 percent taxed at the pass-through rate.

Also, the alternative minimum tax is repealed. The exemption for the estate and gift tax is doubled to $11 million and is then gradually abolished.

And a brand-new 1.4 percent tax on university endowment income is added.

The bill still must be scored and analyzed, first by outside groups like the Tax Policy Center and the right-leaning Tax Foundation, and then by the Congressional Budget Office and the Joint Committee on Taxation. Right now, the math seems to show big, unworkable deficits; remember that bill will eventually be called due. What’s likely, then, is that this is an opening entry designed to pass the House and then be worked over, and shrunk in scale, in the Senate.

The legislation will face a lot of pressure to expand or protect certain cuts. Mortgage lenders and housing builders will push against limiting the mortgage interest deduction, blue-state Republicans will fight the limit on property tax deductions, and just about every business will fight for as much as they can get in corporate tax cuts and pass-through cuts (the fact that lobbying firms are organized as pass-throughs might mean trouble for the rule eliminating pass-through privileges for law firms).

Social conservatives and anti-poverty campaigners will fight for a bigger child tax credit, available to more poor families. Seniors will fight for medical expense deductions.
All that makes the bill more expensive, and harder to pass in the Senate.

Elsewhere, as expected, Trump nominated Jerome Powell to run the Federal Reserve once current Chair Janet Yellen’s term expires in February. Powell is currently a Fed governor, a moderate, he voted right in line with Yellen but is even less enthusiastic about regulation.

Tomorrow is a job’s report Friday. Look for a big rebound from the 33,000 jobs lost in September.

Financial Review

Aggressive Spacing and Large Fonts

Sinclair Noe — September 27, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: Android | RSS

DOW + 56 = 22,340
SPX + 10 = 2507
NAS + 73 = 6453
RUT + 28 = 1485 (record)
10 Y + .08 = 2.31%
OIL + .18 = 52.06
GOLD – 11.20 = 1283.40

The Russell 2000 Index hit a new record high. The S&P 500 index hit an intraday record high but could not take out last week’s closing high.

The Trump Administration finally unveiled their tax cut plan, 9 pages of it (click here for full text). Trump spoke in Indiana today. The framework shrinks the number of tax rates to just three from seven today. The proposed rates are 12%, 25% and 35%. But it will be up to the tax committees to assign income ranges to each rate. The 12% bottom rate is higher than today’s lowest rate of 10%.

The plan doubles the standard deduction, to $24,000 for married couples and $12,000 for single filers. The framework proposes the elimination of most itemized deductions, including the state and local tax deduction. It also eliminates personal exemptions, worth $4,050 per person. So, a family of four could no longer reduce their taxable income by more than $16,000. Now this bears a closer look.

Here’s the important fine print, the plan states: “To simplify the tax rules, the additional standard deduction and the personal exemptions for taxpayer and spouse are consolidated into this larger standard deduction.” Here’s how that math works. Let’s say you are single with no dependents, and you have a moderate income. Currently, you get to take the standard deduction ($6,350) and one personal exemption ($4,050).

If you are 65 or older, you also get to take an additional standard deduction ($1,250). That adds to $10,400, or $11,650 if you’re a senior citizen. The Republican plan would replace all these provisions with a single deduction of $12,000 ($24,000 for married couples.) That’s a 15% increase — except for seniors, who get a 3% increase. Not a doubling, not even close. And then your first dollar of taxable income would be subjected to a 12% tax rate, instead of the current 10%.

Currently, you get to take the personal exemption even if you also itemize deductions, but you only get to take the standard deduction if you forego itemized deductions. Combining these provisions into a single, standard deduction would mean itemizers lose their personal exemption and get nothing back — meaning they’ll typically pay tax on an extra $4,050 of income if they’re single, or $8,100 if they’re married.

The plan does not address the prospects for repeal of popular deductions – the tax breaks for mortgage interest, charitable donations. What happens to other popular deductions is less clear.  The plan would eliminate deductions for state and local tax expenses. States are going to go crazy over that loss.

The National Conference of State Legislatures says the deduction has existed in the federal tax code since its inception. The group says, “tens of millions of middle-class taxpayers of every political affiliation” would experience a greater tax burden if the deduction were eliminated. The group says the deduction’s elimination will also impede states in their efforts to invest in education and other public services.

The plan called for a repeal of the alternative minimum tax, a provision originally intended to tax wealthy households that now reaches well into the middle class. And the plan also calls for eliminating the estate tax.

The document also outlined various provisions for businesses, including a cut in the corporate tax rate to 20 percent, or 25% for small and family-owned businesses conducted as sole proprietorships, partnerships and S corps. But while promising to “modernize” the dozens of tax breaks that favor specific companies and industries, those details remain to be spelled out. It talks about repatriating corporate capital held offshore, but it doesn’t provide any guidance or detail on what rate of tax or any conditions for repatriation.

How to pay for all this without an explosion in the debt and deficit? Animal spirits will lift the economy to tremendous growth – at least that is the argument we are going to here. Cut taxes for corporations and the wealthy, which will shower great jobs on the rabble, which will not only not increase the deficit, it will cut it because so much new revenue will pour in.

More likely, if you get a fiscal boost and tax reform this late in the cycle where most of the slack in the market is eroded, you’re not going to get a lot of bang for your buck. While the rhetoric of cutting taxes sounds good, don’t expect much popular support for specifics. Expect a whole bunch of opposition from various groups who are going to have their specific oxen gored.

The big disappointment is that this whole tax cut plan really doesn’t look serious. It’s 9 pages, and most of those pages have a whole lot of white space and large fonts; the plan has some flowery promises and almost no math. More generally, the plan has so many holes — left for Congress to fill in — that a full picture of who gains the most cannot be drawn at the outset.

The plan could well benefit both the rich and the middle class, at the cost of national debt, but that remains to be seen. If the proposal follows any kind of order, as Senator John McCain has called for, don’t expect anything of substance any time soon. If Republicans thought health care was tough, just wait until they try to tackle tax reform. In that sense, today’s gains on Wall Street can be called a relief rally – a relief that any type of plan was presented, albeit without many details.

The market for Treasury securities experienced one of its worst days of the year, as yields soared. It’s bad enough that the federal budget deficit has already widened, but what’s concerning now is that the government is likely to ramp up bond sales to pay for tax cuts at a time when the Federal Reserve is planning to reinvest less of the maturing proceeds from its bond holdings back into the market.

The amount of marketable US debt outstanding has already increased to $14 trillion from less than $5 trillion the past decade. And don’t forget the repatriated corporate cash isn’t really cash, it is equivalents, meaning a whole bunch is held in US Treasuries.

The pollsters at Gallup periodically ask people what they think is the most important problem in America. Taxes don’t make the top 10 list. Why? Because most Americans don’t pay much of anything in federal taxes.  In an NBC/ Wall Street Journal poll, 62% of those polled said taxes should go up on the wealthy, and 55% said taxes should rise for corporations.

The biggest threat to the U.S. economy over the next 6 months: North Korea? Rising interest rates? Terrorism? A stock market drop? Nope. Thirty-six percent of Americans chose “the political environment in Washington” as the biggest threat to the economy, according to a new survey by personal finance website Bankrate.com. That easily beat out the next four choices: the threat posed by North Korea (24%), rising interest rates (10%), terrorism (10%) and a decline in the stock market (8%).

Orders for durable or long-lasting goods such as passenger planes rose 1.7% last month. The increase stemmed mainly from a big batch of orders for commercial aircraft. Bookings surged 45%. Demand was higher for most other manufactured goods, but bookings grew at a slower pace. Orders minus transportation edged up 0.2%. The government said Hurricane Harvey appeared to have little effect. The storm slammed the Houston area hard late in the month, but probably too late to reduce orders.

The Commerce Department on Tuesday slapped preliminary anti-subsidy duties of 220 percent on Bombardier jets, which could effectively shut Bombardier out of the US market if upheld, after rival Boeing launched a trade challenge accusing Canada of unfairly subsidizing the aircraft. The dispute could spill into talks between Canada, the United States and Mexico to update the North American Free Trade Agreement. Negotiators are meeting in Ottawa.

Americans signed fewer contracts to buy homes in August, the fifth month of declines in the last six. The National Association of Realtors’ pending home sales index fell 2.6% to 106.3. That was the lowest reading since January 2016 and put the index 2.6% lower than its level a year ago. There is a supply-demand imbalance with very tight inventories.

Here we go again: Sonic may be the latest company to face a cybersecurity breach. The drive-in restaurant chain — which has 3,500 locations across the United States — said that a credit card processing company noticed peculiar activity on some Sonic customers’ cards. That’s a telltale sign that hackers targeted Sonic. The company said it’s not yet clear how many restaurants or customers may be impacted.

Amazon announced a bunch of new hardware today. Amazon introduced 5 new Echo hardware products. The big difference seems to be better speakers. Also, they announced their voice assistant, Alexa, will be available in BMW cars. Amazon also unveiled tiny “Echo Button” devices that can be configured to work and control an Amazon Echo. In one instance, Amazon showed how a family might play a game like “Trivial Pursuit” using the buttons to chime in for answers.

The Echo Connect is a $35 box that will allow you to place phone calls to landlines using your existing Amazon Echo units. The Echo already supports calling between Echos, but that acts more like an intercom system. Amazon also unveiled a new Fire TV dongle that plugs into the back of a TV (it uses HDMI). It will support 4K content. Resistance is futile.

Meanwhile, Google celebrates its 19^th anniversary today. I have no idea how we found anything 20 years ago.